Insights |Risk Management

25th March 2024

How to manage director or shareholder disputes in a limited company

A director or shareholder dispute can create serious tension and disruption within a limited company.

By guest author Jon Munnery of UK Liquidators.

A director or shareholder dispute can create serious tension and disruption within a limited company.

This is why it is always worthwhile putting a policy in place to manage disputes before they affect operational effectiveness.

The bad feeling caused by a dispute can lead to neglect of the company’s day-to-day requirements, such as a failure to monitor cash flow or customer complaints. In these instances, the business could enter a financial decline unnoticed or experience a loss of trade due to poor customer service.

What are the common reasons for disputes within a limited company?

Conflicts within a limited company can arise for many reasons, but some of the most common triggers include:

  • Disagreement over future business strategies.
  • Director performance.
  • Employing family members.
  • Breach of director duty.
  • Director salaries being too high.
  • Dividend payouts being too low.
  • 50:50 director or shareholder deadlocks.

So how can director and shareholder disputes be managed and resolved before they become too detrimental to the company?

Managing director and shareholder disputes

Disputes within a limited company may be managed using the company’s Articles of Association and/or a shareholders’ agreement if one is in place. It is advisable to draft a formal shareholders’ agreement at an early stage, although it is possible to create one at any point.

If a dispute becomes lengthy or appears to be impossible to resolve, expert intervention from a qualified third party may also provide a solution that allows the company to move forward.

Include a dispute resolution process in the Articles of Association

Detailing a formal procedure for resolving disputes provides a clear template for moving past a commercially dangerous period without jeopardising the company’s current success or future plans.

The Articles of Association are written rules on how the company will be run and they provide the perfect opportunity to lay out how disputes should be dealt with. As an example, the Articles might state that if the dispute cannot be resolved ‘in-house,’ the company can appoint a professional mediator to guide directors towards a resolution.

Use a Shareholders’ Agreement

A shareholders’ agreement is a formal written agreement between the shareholders of a company and often provides them with more rights than the company’s Articles of Association.

An agreement can cover various aspects of business, such as financing and management, but also how disputes will be resolved. Without a shareholders’ agreement that includes dispute resolution, conflicts may be more common and lengthy.

Resolution between shareholders or shareholders and directors would have to rely on the process detailed in the Articles of Association, which may not provide the same protection for shareholders as a formal agreement.

Removing a director

Sometimes a dispute cannot be resolved either in-house or by using mediation and the only way forward may be to have a director removed. This might be the case if the director refuses to resign, for example, and they have seriously breached their duties as a director.

The company’s Articles may state the circumstances in which a director can be removed, and how this should be done, allowing the company to progress without the distraction of a prolonged conflict.

Seeking professional assistance during a shareholder dispute

Obtaining advice from a qualified third party during a dispute can protect the company from protracted disruption and possible loss of reputation. If the potential for disputes is considered at an early stage, and dispute resolution is included in the business plan, it can ease a challenging problem and allow a company to reach its full potential.

Jon Munnery is an insolvency and company restructuring expert at UK Liquidators, a leading provider of company liquidation services to both solvent and insolvent limited companies.

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